West Virginia state regulators closed The First State Bank this Friday, April 3rd. This is the second bank to fail in 2020, and it’s the first bank to fail in the coronavirus crisis. Even though this bank failed in the coronavirus crisis, it had major financial problems long before the pandemic started. Based on the 2019 Q4 bank call reports from the FDIC (the latest available), this bank had the highest Texas Ratio of any bank in the nation (1,050%). Any bank with a Texas Ratio greater than 100% is considered at risk.
The coronavirus crisis will likely result in a large increase in loan defaults and other conditions that will stress banks. Help from the Federal Reserve, the Treasury, the FDIC and other regulators should prevent mass bank failures, but the number of bank failures will likely increase over the next year. An example of what may occur can be seen in the bank failure data during and after the 2008 Financial Crisis. This is shown below.
Number of bank failures around the time of the 2008 Financial Crisis:
- 2006: 0
- 2007: 3
- 2008: 25
- 2009: 140
- 2010: 157
Most banks failed in 2010, two years after the crisis reached its climax in 2008. Thus, it will likely take some time before we see the first bank failure that’s the result of the coronavirus crisis.
We are still in a relatively calm period for bank failures that began in 2015. From 2015 to 2019, there have been no years in which more than 8 banks have failed. No banks failed in 2018, and only four failed in 2019.
Details of The First State Bank Failure
According to this FDIC press release, “The First State Bank had approximately $152.4 million in total assets and $139.5 million in total deposits. In addition to assuming all of the deposits, MVB Bank agreed to purchase approximately $147.2 million of The First State Bank's assets. The FDIC will retain the remaining assets for later disposition.”
Only Uninsured Brokered Deposits May Be At Risk
All deposits that were directly held at the failed bank, even those above the FDIC limits, were transferred to the new bank as described in the FDIC’s FAQs:
No one lost any money on deposit as a result of the closure of this bank. All of the deposits, regardless of dollar amount, were transferred to MVB Bank, other than the Cede & Co. deposits which will be returned to them.
Both insured and uninsured deposits that were directly held at The First State Bank were transferred to MVB Bank. Thus, even depositors who had over the insurance limits had no loss in this failure. However, brokered deposits managed by Cede & Co. were not assumed by MVB Bank. Consequently, there is a possibility that someone may have lost money on a portion of their brokered deposits that exceeded the FDIC coverage limits. It demonstrates that uninsured brokered deposits are more at risk than uninsured deposits directly held at a bank.
Past Cases When All Uninsured Deposits Were At Risk
Occasionally, banks fail and uninsured deposits directly held at a bank are not covered. That happened last year in the first 2019 bank failure. In that case, the acquiring bank only agreed to assume insured deposits. Depositors who had over the insurance limits were at risk of losing some or all of their uninsured deposits. In previous years, banks have also failed without an acquiring bank. In those cases, the FDIC liquidates the bank and sends checks to depositors of only their insured deposits.
Customer Access To Deposits
Another benefit when the FDIC arranges for an acquisition of a failed bank is that the new bank will typically allow customers of the failed bank to continue to use their accounts without any immediate changes. According to MVB Bank’s press release on this acquisition:
Over the weekend, First State clients will be able to access their money by writing checks, accessing online banking or using an ATM or their debit card.
CD Rates May Be Reduced
For this bank failure, the only concern for insured depositors are those with CDs that had high rates. First State Bank had been offering long-term CDs with yields as high as 2.50% in 2019. Those rates may not last as the FDIC describes in its FAQs:
Interest on deposits accrued through close of business on Friday, April 3, 2020, will be paid at your same rate. The First State Bank’s rates will be reviewed by MVB Bank and may be lowered, and you will be notified in writing of any changes. You may withdraw funds from any transferred account, regardless of whether your interest rate changes, without early withdrawal penalty until you enter into a new deposit agreement with MVB Bank.
Cause of the Failure
DepositAccounts.com had given The First State Bank an “F” grade on its financial health based on data from its December 31, 2019 call reports. As mentioned above, this bank had the highest Texas Ratio in the nation (1,050%). Any bank with a Texas Ratio greater than 100% is considered at risk.
The failure of The First State Bank differed from the first bank that failed in 2019 and the last bank to fail in 2017. In both of those cases, fraud was the primary cause of the failures. Due to the fraud, the financial health grades didn’t help predict the failures. Also, the fraud caused the acquiring banks to decide to only assume the insured deposits. Customers at those banks with uninsured deposits were at risk of losing those deposits.
Those previous two bank failures were an important reminder why everyone should make sure that their deposits (total of both principal and interest) are kept below the FDIC and NCUA insurance limits at each of their banks and credit unions.
Credit Union Liquidations and Conservatorships
There have been no new credit union liquidations or conservatorships since the first half of last year. One credit union was liquidated in March 2019, and two credit unions were placed into conservatorship in April and May. In a conservatorship, the NCUA takes over the management of the credit union with the goal of resolving the issues. If the issues cannot be resolved, the NCUA will either arrange for a merger of the conserved credit union into a healthy credit union or liquidate the credit union.
- FDIC list of failed banks
- NCUA database of failed and conserved credit unions
- Latest FDIC info on deposit insurance